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Bonds Slump in India After RBI Surprises With Hawkish Minutes

(Bloomberg) -- Indian bonds tumbled as unexpectedly hawkish central bank minutes added to the pressure of higher oil prices, boosting bets policy makers will raise interest rates. The rupee fell to its weakest in more than a year.

The nation’s 10-year yield closed nine basis points higher at 7.72 percent in Mumbai, after jumping as much as 17 basis points earlier. It climbed 29 basis points this week. The rupee fell past 66 per dollar to the lowest level since March 2017, as foreign funds pared holdings of local-currency debt for a fifth day on Thursday.

Minutes of the April 4-5 meeting released Thursday showed most monetary policy committee members were optimistic the economy would rebound this year and actual output would move closer to its potential. Reserve Bank of India Deputy Governor Viral Acharya said he would vote for the start of the “withdrawal of accommodation” at the next meeting in June.

The 10-year bond yield “has room to rise quite substantially,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “If this new bout of spike in commodity prices sustains till the June policy, then the RBI would definitely change its stance, and August is a real possibility of a hike.”

Ten-year bonds declined for a second week after the yield surged 25 basis points last week. It had dropped in each of the previous five weeks as policy makers took a slew of measures to revive the bond market. A scheduled sale of bonds partially devolved on primary dealers on Friday. Bond trading hours were extending by more than an hour to to 6:15 p.m. in Mumbai.

Read: Bond Rally in India Fizzles as Oil Spike Stokes Inflation Fears

“Risk appetite is already very weak, nationalized banks are booking profits wherever available, the global environment is not conducive, and on top of that, you have the hawkish RBI minutes,” said Choudhary.

One-year interest-rate swaps climbed six basis points Friday to 6.57 percent, the highest in about two months. The move in interest-rate swaps indicates that the timeline for rate hikes has been brought forward by three-to-six months, said Vijay Sharma, New Delhi-based executive vice president for fixed-income at PNB Gilts Ltd.

The rupee weakened 0.5 percent to close at 66.1075 per dollar, the fifth day of declines. Overseas investors cut holdings of rupee-denominated government and corporate bonds by 16.6 billion rupees ($251 million) on Thursday. They sold a net $98.3 million of Indian shares on April 19.